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_____________________________________________________
Farm Name: ________________________________________
Year: _________________* Completed yearly
Farm Financial
Statements &
Recordkeeping
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Contents
Glossary of Terms ............................................................................................................................ 3
Financial Statements ....................................................................................................................... 4
Income Statement ....................................................................................................................... 4
Balance Sheet .............................................................................................................................. 6
Chart of Accounts ............................................................................................................................ 8
Account Types ............................................................................................................................. 8
Example Chart of Accounts .......................................................................................................... 8
Appendix 1: Income Statement Template ...................................................................................... 10
Appendix 2: Balance Sheet Template ............................................................................................. 11
Appendix 4: Schedule F ................................................................................................................. 12
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Glossary of Terms
Account Types– Businesses categorize financial activities by grouping them into different accounts
that are qualitatively distinct. The major account types are: Income, Expenses, Assets, Liabilities,
Equity
Income/Revenue - Earnings from sales of product or services, or through other means
Cost of Goods Sold (COGS) – direct costs of making a sale, or cost of product that will be resold
Gross Profit – Difference between total revenue and COGS
Expenses – Costs associated with running your business
Operating Expenses – Expenses directly related to the operational activities of the business
Assets – what the business has that has economic value (land, equipment, buildings, cash, etc.)
Liabilities – what the business owes (loans, credit card balances, etc. – i.e. debt)
Equity – what the business owns, and the difference between assets and liabilities, or the “worth of
the business” in monetary terms
Net Income – Difference between total revenue and total expenses
Retained Earnings - cumulative net income from previous years (minus owners’ draw)
Owners’ Draw – money that owners take out of business to pay themselves
Financial Statements – Financial documents used in accounting that summarize financial activity in
your business. The three primary financial statements are: the income statement, the balance sheet
and the cash flow statement.
Income Statement – summarizes income, expenses and net income, over a period of time
(e.g. month, quarter, year, etc.)
Balance Sheet – summarizes assets, liabilities and owners’ equity (“net worth”) and must
always be in balance, according to the following formula: ASSETS = LIABILITIES + OWNERS’ EQUITY
Cash Flow Statement – summarize changes in cash position -- cash coming in and going out
of business, over a period of time
Budget – Summary of projected income and expenses for future period (usually year or multiple
years)
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Financial Statements
Financial statements are tools that help business owners organize, interpret and analyze the
financial activities of their business, as well as understand the profitability, cash position, and worth
of their business overtime and at any single point in time.
Unlike a budget, which a business owner can choose to create or not, the financial statements are a
reflection of business activity, and are therefore inherent to it. The moment a business earns any
revenue or incurs any expense, or records ownership of any product or obligation of any debt, the
financial statements come into existence to reflect the financial activity taking place. There are
three primary financial statements:
• Income Statement
• Balance Sheet
• Cash Flow Statement
Understanding how to organize and interpret financial statements will help you with overall
financial management of your business. Additionally, financial statements are the main documents
required for applying for a loan or raising capital, as well as for filing taxes.
Each statement summarizes financial activity in a different way, and together, they communicate
three key financial indicators that describe the financial “health” of your business:
a. What your business is earning and spending over a period of time (Income Statement)
b. What your business has, what it owes, and what is owns, at any single point in time (Balance
Sheet)
c. What the cash position of your business is – i.e. how much cash you have – and what the
cash flow of your business is – i.e. how cash “flows” in and out of your business (Cash Flow
Statement)
Think of these key indicators as the “language” of business. The more fluently you speak it, the
better you will be able to manage the financial affairs of your business, and communicate with
banks, lenders, investors, accountants, etc.
Income Statement
The Income Statement reflects earning coming into the business, or “income,” and spending going
out of the business, or “expenses.” Because earning and spending are ongoing within a business,
the income statement presents a summary of activities over a period of time (e.g. week, month,
quarter, year, etc.).
Primary Features
• Summarizes activities over a period of time
• Details activities directly associated with the business operations, e.g.:
o Product Sales
o Seed purchases
o Wages and payroll expense
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o Rent expense
o Etc.
• Also details activities not directly associated with operations, e.g.
o Rental income, for example, if business owner leases land to another farmer
o Interest expense on a loan
o Depreciation expense on equipment or infrastructure
o Tax expense
• Presents total revenue, total expenses, and difference between revenue and expenses, or
“net income”
Note: The income statement is sometimes referred to as the “profit and loss statement.”
Ultimately, the purpose of the income statement is to help you understand the profitability of
business activities, by comparing income and expenses and coming up with your net income (profit)
or net loss.
All income statements display revenue, expenses, and net income, but it is somewhat up to you
how you organize them. At the very least, it is important that your income statement includes the
relevant revenue and expense categories listed on the Schedule F form (see section on Schedule F),
which is the tax form that all farmers should file each year. For further analysis, you may find it
helpful to organize your income statement by the following categories.
Sales: Sales activities are generally presented on the income statement in one of two ways: 1) by market
channel (e.g. wholesale, farmers’ market, CSA, etc.), or 2) by product type (e.g. produce sales, meat sales, value
added sales, etc.). For the income statement, it is best to stick to one, in order to keep the information
consistent. That said, business owners can create separate financial reports that look at sales by sales channel
and product type (e.g. produce sales at farmers’ markets vs. produce sales through a CSA). Accounting software
programs (QuickBooks, etc.) make it easy to generate these more detailed reports.
Cost of Goods Sold (COGS): For farm businesses, COGS can be confusing to track. Generally, COGS refer to costs
incurred with each additional sale, where for every sale made, there is the associated COGS. But for a farm
business, the distinction between costs associated with sales and costs not associated with sales is a blurry one.
If you sell 10 cases of kale, is the kale a COGS? What about the packaging? What about the labor to harvest and
pack the kale? What about the delivery? For many farm businesses, it is more straightforward to track
“variable” and “fixed” costs (defined below), instead of COGS. The exception to this would be if you buy in
product for resale. For example, if you run a CSA and you buy some product from other farmers, the cost of that
product would be tracked as a COGS. For our purposes, we will focus on variable and fixed costs.
Variable vs. Fixed Costs:
In short, variable costs increase as sales increase, whereas fixed costs stay more or less constant regardless of
sales. For example, packaging is a variable expense – for every additional case sold, you need an additional box.
Internet, on the other hand, is a fixed cost. Regardless of your sales for the season, your monthly internet
expense remains the same. Separating expenses into these two categories can help you understand what it
costs to make a sale, which will give you important information about the price you need to charge for your
product, whether or not you want to continue growing a certain crop, etc.
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Within one season, it is fairly straightforward to identify the variable and fixed costs that make up your
operating expenses. However, year over year, it gets more complicated, specifically with regard to assessing
fixed costs. As a farm business grows, its fixed costs change. In that sense, many fixed costs are still variable, but
over a longer period of time. Rent is a good example of this. If you rent one acre, your rent cost is fixed
regardless of your sales for the season. But as you build your business, you will likely expand production based
on increased demand for your product. In order to expand production, you will acquire more land, so your rent
expense will increase. While the rent cost is fixed for a given season, irrespective of sales, the increase in land is
an result of the increase in sales.
Operating Expenses: Operating expenses encompass all expenses related to business operations. For tax
purposes, simply listing operating expenses according to the Schedule F categories (see Schedule F) is sufficient.
However, you may find that further categorizing your operating expenses gives you valuable insight into
spending patterns, which can be very helpful when making management decisions for your business. Below are
examples of the types of categories that can be useful:
• Direct operating expenses are those that are associated directly with production and sales: seeds &
plants, fertility & pest management, supplies and packaging, animal feed, farmers’ market fees, delivery
costs, etc.
• Labor costs include employees’ wages and benefits, payroll taxes and contract labor costs. Importantly,
payment to owners is not considered a labor cost. Owners’ payment shows up on the balance sheet.
• Land or occupancy costs include rent or mortgage expense, property taxes, utilities, etc.
• Repairs and maintenance costs include repairs to equipment, buildings, irrigation systems, vehicles,
etc.*
• Administrative/general costs include expenses not directly associated with production and sales, such as
office supplies, insurance, phone and internet expense, accounting or CSA software expense, marketing
and advertising, mileage and other vehicle expenses. Sometimes these general costs are referred to as
“overhead” costs.
Balance Sheet
The income statement summarizes the incoming and outgoing flow of money (or its proxy, for example, if you
trade your products for other goods or services) in the business, otherwise known as earning and spending. It
also shows you how profitable your business is, based on its direct operating activities. But the income
statement can’t really tell you how much your business is worth, or whether it is increasing or decreasing in
value over time.
However, higher value purchases are not included on your income statement. Large purchases of equipment,
infrastructure, land, etc. do not show up on the income statement because, while you incur the expense of
purchasing them, you also now have something that adds value to your business. The income statement can’t
really quantify that increased value in your business, so we need a different tool to measure the overall value of
your business. That tool is the balance sheet.
The balance sheet summarizes what a business owns and owes, and in turn, what it is worth. What is owns is its
“assets.” An asset is something that the business owns, that will last multiple years and has a significant
monetary value. What it owes is its “liabilities,” or debt. A liability, or debt, is something that a business owes,
which is generally a loan of some kind. The difference between assets and debt is the “owners’ equity” of a
business, also called “net worth.” The balance sheet summarizes assets, liabilities and owners’ equity at one
point in time (usually at the end of a fiscal period, e.g. month, quarter, year, etc.). Whereas the income
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statement is like a video clip summarizing business activity over a period of time, think of the balance sheet as a
snapshot of your business at a single moment.
There is a formula for the balance sheet that must always be true:
ASSETS = LIABILITIES + OWNERS’ EQUITY
Primary Features
• Gives a snapshot of the business at one point in time
• Summarizes assets (what the business owns), liabilities (what the business owes) and the owners’ equity
(net worth) of the business (the difference between assets and liabilities)
Assets
Assets are tangible things that your business owns, and that could theoretically be sold to generate cash.
Generally speaking, assets can be used for more than one year, and are worth at least several hundred dollars.
• Cash in the bank – yes, cash is an asset!
• Outstanding invoices – unpaid invoices that customers still owe you (“accounts receivable”)
• Tractor and implements
• Vehicles
• Buildings
• Land
• Etc.
Liabilities
• Operating or equipment loan
• Mortgage
• Credit card balances
• Line of credit
• Unpaid bills
• Etc.
Owner’s Equity (Net Worth)
• Retained earnings – net income of current year + cumulative net income from previous years
• Grants
• Owners’ equity
• (-owners’ draw)
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Chart of Accounts
Account Types
ASSETS – what the business has, including land, buildings, equipment, breeding animals, etc. Also includes,
business bank accounts, cash on hand, prepaid expenses and accounts receivable (unpaid invoices).
LIABILITIES – what the business owes (its debt), including short- and long-term loans, credit card balances,
mortgage, etc.
EQUITY – what the business owns, including the owners’ capital, retained earnings, net income (or loss) at the
end of the year, minus owners’ draw
INCOME – revenue generated from sales, as well as rent revenue or any other business activity that generates
revenue (such as educational offerings, events, agritourism, etc.)
EXPENSES – any costs associated directly business operations, including costs directly associated with
production, such as seeds, packaging, payroll, inputs, etc., as well as administrative and general costs. It also
includes costs not directly related to operations, such as interest expense.
Example Chart of Accounts
Account Name
Account Type
Sales: Wholesale
Income
Sales: CSA
Income
Sales: Farmers’ Markets
Income
Sales: Restaurants
Income
Direct Operating: Car and Truck Expenses
Expense
Direct Operating: Fertilizer and Spray
Expense
Direct Operating: Gasoline, fuel
Expense
Direct Operating: Packaging
Expense
Direct Operating: Repairs and Maintenance
Expense
Direct Operating: Seeds and Plants
Expense
Direct Operating: Storage
Expense
Direct Operating: Supplies/Small Tools
Expense
Direct Operating: Vehicles, Machinery, Equipment
Expense
Payroll: Labor Expense
Expense
Payroll: Workers’ Comp
Expense
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Payroll: Employee Benefits
Expense
Payroll: Payroll Service
Expense
General/Administrative: Computer/Printer
Expense
General/Administrative: Insurance (General/Product
Liability)
Expense
General/Administrative: Certifications/Licenses/Permits
Expense
General/Administrative: Marketing/Advertising
Expense
General/Administrative: Office Supplies
Expense
General/Administrative: Software/Website
Expense
General/Administrative: Telephone/Internet
Expense
Occupancy: Rent/Lease
Expense
Occupancy: Utilities
Expense
Other: Interest expenses
Expense
Other: Taxes
Expense
Business Checking Account
Bank
Cash on Hand
Bank
Accounts Receivable
Current Asset
Inventory
Current Asset
Owned Land
Long Term Asset
Business Credit Card
Credit Card
Accounts Payable
Current Liability
Mortgage
Long Term Liability
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Appendix 1: Income Statement Template
Start date: End date:
Revenue
$ Value
Sales
Wholesale
CSA
Farmers’ Markets/Farm Stands
Restaurants
Other
Total Revenue
Cost of Goods Sold (product purchased for resale)
Gross Profit
Operating Expenses
Direct Operating Expenses
Seeds and Plants
Fertilizer and Spray
Feed
Pest Management
Supplies and Packaging
Hired Labor
Hired Employees - wage + payroll
Workers' Comp + Disability
Contract Work
General & Administrative Expenses
Liability Insurance
Office Supplies
Telephone/Internet
Software (Accounting, POS, etc.)
Marketing/Advertising
Permits, Licenses, Certifications
Other
Repairs & Maintenance Expense
Car and Truck Expenses (mileage)
Storage
Fuel
Repairs & Maintenance Expense
Tools
Other
Occupancy
Rent/Lease
Utilities
Total Operating Expenses
Operating Income
Other Expenses
Interest Expense
Depreciation
Total Other Expenses
Income before Taxes
Taxes
Net Income (or loss)
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Appendix 2: Balance Sheet Template
As of date:
ASSETS
$ Value
Current (short-term) Assets
Farm Bank Account
Cash on Hand
Accounts Receivable
Inventory
Fixed (long-term) Assets
Farm Land
Farm Equipment
Farm Vehicles
Farm Buildings
Other
Total Depreciation (-)
Total Assets
LIABILITIES
Short-term Liabilities
Credit Card Loan Balance
Accounts Payable
Operating Loan Balance (1-12 mos.)
Long-term Liabilities
Tractor/Equipment Loan Balance
Mortgage
Long-term Operating Loan Balance (12+ mos.)
Vehicle Loan
Other Loans/Debt
Total Liabilities
EQUITY
Owners' Capital/Owners' Contribution
Net Income (or loss)
Retain Earnings
Owners' Draw (-)
Total Equity
Total Liabilities + Total Assets
ASSETS = LIABILITIES + EQUITY
